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Medicare Could Cost You More Than You Think in 2019

Roughly 70% of Social Security recipients have their Medicare Part B premiums automatically deducted from their Social Security check every month, and according to Medicare those deductions are going to increase in 2019. Medicare Part B premiums will increase to $135.50 in 2019 from $134 in 2018, but the increase could be bigger for Americans who have been protected from past premium increases by Social Security's hold harmless provision, a rule that prevents premiums from increasing by more than recipients' Social Security checks.

First, some background on Medicare Part B

Medicare consists of various "parts." Generally speaking, Part A covers hospitalizations, Part B covers traditional healthcare services such as primary care, and Part D covers prescription medicine. There's also Part C, or Medicare Advantage, which can combine coverage from Parts A, B, and D.

The word Medicare written where George Washington's face would otherwise be on a one dollar bill.

IMAGE SOURCE: GETTY IMAGES.

Medicare recipients usually aren't charged a premium for Part A, but they are charged monthly premiums for Part B and Part D, and they can be charged for Part C, too, depending on the plan's coverage.

U.S. income tax revenue funds most of Part B costs through the government's general fund, but about 25% of the program's expenses are paid for by recipients via their premiums. Those premiums are usually quoted for average income Medicare recipients, but high-income earners may pay more. For example, the following chart shows the premiums paid by recipients by income level.

How premiums are changing in 2019

As I mentioned, Medicare Part B premiums are increasing by about 1.1% in 2019 to $135.50, but many Americans could see their premium increase by more than that because they've previously benefited from the hold harmless provision.

Social Security uses the consumer price index for workers (CPI-W) to calculate annual increases to benefits, and because healthcare costs have historically risen much faster than other goods and services, Part B premiums have increased by more than Social Security's annual cost-of-living adjustments, or COLAs.

Fortunately, the hold harmless rule prevents Medicare Part B premiums from increasing by more than Social Security increases (in dollar terms) every year. That keeps rising premiums from causing your Social Security income to fall. Unfortunately, the freeze on premiums is temporary. As Social Security income increases, recipients have to pay more toward premiums until they reach the current year's premium amount.

In 2018, catching up to current premiums caused millions of Americans to forgo their 2% Social Security COLA increase. According to the Senior Citizens League, about 40% of all Social Security recipients saw a $5 or less increase in their Social Security because most of their increase went to bringing their Part B premium to current levels.

The situation won't be as bad next year, but millions of people are still paying less than they're supposed to for Part B insurance, and that means a good chunk of their 2.8% Social Security benefit increase in 2019 could go to Medicare again. For instance, the average person who is held harmless is paying a premium of $130, rather than $134, in 2018, so if they pay the $135.50 premium in 2019, their premium will increase 4.2%, not 1.1%.

The premium increase paid by high-income earners could be even bigger. The following table shows how much high-income earners will pay in Part B premiums in 2019. As you can see, Americans in the highest income bracket will pay Part B premiums that are 7.4% higher than they were in 2018.

It cost Medicare $710.2 billion to cover 58.4 million Americans in 2017, and according to Medicare's trustees, costs will continue to climb for the foreseeable future. In its 2018 annual report, it estimated Medicare spending as a percentage of U.S. gross domestic product would climb to 5.9% in 2042 from 3.7% in 2017 under current law, and that if cost protections provided by the Affordable Care Act were dismantled, Medicare spending could increase to 6.2% of GDP in 2042. Given this outlook, it looks like Medicare Part B premiums will continue to take a big bite out of your Social Security COLA increases in the future, too.